GST withholding regime to commence from 1 July 2018

Commencing 1 July 2018, purchasers of new homes will have to pay GST directly to the Australian Tax Office (ATO), rather than to the vendor. While not a new tax for developers, the passing of the new legislation shifts the responsibility for paying GST on new residential premises and subdivisions from developers to purchasers.

Key features

The law applies to new residential land and ‘potential residential land’. Generally, new residential land is land which has not previously been sold as residential premises or created through substantial renovation. Potential residential land is land on which no residential premises exist but which can legally be used for residential purposes (for example, newly subdivided land zoned for residential use).

From 1 July 2018:

Developers must issue a notice to a purchaser at least 14 days prior to settlement of any residential premises (not just new residential premises) advising how much GST is required to be withheld (if applicable), when it is to be paid and the vendor’s ABN. Notice is not required where the purchaser is registered for GST and acquires the land for a creditable purpose or where the supply is of commercial residential premises. Penalties will apply for failure to issue a notice.

Purchasers of new residential land and potential residential land will be responsible for withholding and remitting 1/11th of the stated contract purchase price directly to the ATO at settlement. Purchasers may be penalised if they fail to withhold the GST amount and remit it to the ATO.

Where the margin scheme applies, a reduced withholding rate of 7% applies.

A developer must report the actual GST amount through its business activity statement (BAS) and will be entitled to a credit for the amount paid to the ATO by the purchaser, and a refund if it exceeds the actual GST liability.

If a developer remits quarterly or annually and makes a supply under the margin scheme, refunds for any excess withholding can be made before the BAS is lodged.

Refunds will be available where a purchaser has withheld and paid the GST to the ATO in error.

Impact of the changes

The new law is likely to impact a developer’s cash flow as it removes the ability for developers to use the often not insignificant cash from GST collected from sales proceeds for up to three months before their BAS is due.

Even though transitional relief will apply until 1 July 2020 for contracts signed before 1 July 2018, developers should be mindful that the relief is unlikely to extend to contracts entered into under any put and call arrangements if those contracts come into existence after 1 July 2018.

Transitional provisions also apply to ‘waterfall’ payment arrangements under property development agreements entered into prior to 1 July 2018, provided certain conditions are satisfied.

Further information / assistance regarding the issues raised in this article is available from the author, Fiona Nelson, Partner or your usual contact at Moray & Agnew.